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Porter's Five Forces & Porter's Value Chain Model

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Porter's Five Forces & Porter's Value Chain Model

  1. 1. Five Forces Model Value Chain Model (AUTOMOTIVE INDUSTRY) Prepared By: Mohd Shahril Bin Mat Nordin GP02684 National University of Malaysia TTTU6414 | Information Technology Management Porter’s| Analyses
  2. 2. OUTLINE 1. Overview of Porter’s Five Forces Model 2. Porter’s Five Forces Model Analysis for TOYOTA 3. Overview of Porter’s Value Chain Model 4. Porter’s Value Chain Model Analysis for PERODUA 5. Conclusion 6. References
  3. 3. Porter’s Five Forces Model Overview
  4. 4. Figure 1 : Porter’s Five Forces Model • Also known as competitive forces model developed by Michael E. Porter in 1979 to understand how the five competitive forces impacting an industry. • An analysis tool to determine the profitability of an industry and develop a firm's competitive strategy. • As a framework that classifies and analyses the most important forces that affect the intensity competition in an industry and its profitability level. Porter’s Five Forces Model | Overview
  5. 5. THREAT OF NEW ENTRANTS BARGAINING POWER OF BUYERS Buyers or customers have the power to demand lower prices or higher quality products from industry manufacturers when their bargaining power is strong. Lower prices mean lower revenues for the producers, while the high quality products typically increase the cost of production resulting . in lower profits for the producers. This force determines how easy (or not) to enter a particular industry. If an industry is profitable and there are few barriers to enter, competition soon intensifies. When more organizations compete for the same market share, profits start to fall. It is important for existing organizations to build high barriers to enter in order to prevent new entrants. Possible Factors : • The existence of barriers to entry • Government policy • Capital requirements • Absolute cost • Cost disadvantages independent of size • Economies of scale • Product differentiation • Brand equity • Switching costs or sunk costs • Expected retaliation • Access to distribution • Customer loyalty to established brands • Industry profitability RIVALRY AMONG EXISTING COMPETITORS BARGAINING POWER OF SUPPLIERS THREAT OF SUBSTITUTES Possible Factors : • The Buyer concentration to firm concentration ratio • Degree of dependency upon existing channels of distribution • Bargaining leverage, particularly in industries with high fixed costs • Buyer switching costs relative to firm switching costs • Buyer information availability • Force down prices • Availability of existing substitute products • Buyer price sensitivity • Differential advantage (uniqueness) of industry products • The total amount of trading This force is the main determinant on how competitive and profitable of a particular industry. It is most likely to be high when entry barriers are low, threat of substitute products is high, and suppliers and buyers in the market attempt to control. Possible Factors : • Sustainable competitive advantage through innovation • Competition between online and offline companies • Level of advertising expense • Powerful competitive strategy • Firm concentration ratio • Degree of transparency Strong bargaining power of suppliers will allow them to sell higher priced or low quality raw materials to their buyers. This directly affects the buying firms’ profits as it has to pay more for materials. This force is mainly threatening when buyers or customers can easily find substitute products at attractive prices or better quality and when they can switch fromone product or service to others at low cost. Possible Factors : • Supplier switching costs relative to firm switching costs • Degree of differentiation of inputs • Impact of inputs on cost or differentiation • Presence of substitute inputs • Strength of distribution channel • Supplier concentration to firm concentration ratio • Employee solidarity (e.g. labour unions) • Supplier competition: the ability to forward vertically integrate and cut out the buyer. Possible Factors : • Buyer propensity to substitute • Relative price performance of substitute • Buyer switching costs • Perceived level of product differentiation • Number of substitute products available in the market • Ease of substitution • Substandard product • Quality depreciation Porter’s Five Forces Model | Overview
  6. 6. Porter’s Five Forces Model Analysis for TOYOTA
  7. 7. The Company Company Name Toyota Motor Corporation President and Representative Akio Toyoda Director Company Address Head Office 1 Toyota-Cho, Toyota City, Aichi Prefecture 471-8571, Japan Phone: (0565) 28-2121 Tokyo Head Office 1-4-18 Koraku, Bunkyo-ku, Tokyo 112-8701, Japan Phone: (03) 3817-7111 Nagoya Office 4-7-1 Meieki, Nakamura-ku, Nagoya City, Aichi Prefecture 450-8711, Japan Phone: (052) 552-2111 Date founded August 28, 1937 (by Kiichiro Toyoda) Capital 397.05 billion yen (as of May 2014) Shareholders Shareholder Composition Fiscal Year From April 1 to March 31 of the following year Main Business Activities Motor Vehicle Production and Sales Business Sites Information on Business Sites Number of employees (consolidated) 338,875 (as of March 31, 2014) Porter’s Five Forces Model Analysis
  8. 8. 1 | Threat of New Entrants Porter’s Five Forces Model Analysis Threat of new entrants to the Toyota and the automotive industry isWeak. Toyota is not only a company that established in Japan but has been operating around the world and standards for cars have been universally accepted. It epitomizes the global market and very experienced and knowledgeable in automotive industry. It is almost impossible that a new company would appear to be a new threat to Toyota and its target markets around the globe according to research conducted. Toyota has been around and well established for many years, strengthen its reputation, experience and knowledge. There are many barriers to enter in this industry as stated below : Large amount of capital required High retaliation possible fromexisting companies, if new entrants would bring innovative products and ideas to the industry Few legal barriers protect existing companies fromnew entrants All automotive companies have established brand image and reputation Products are mainly differentiated by design and engineering quality A firm has to produce at least 5 million (by some estimations) vehicles to be cost competitive, therefore it is very hard to achieve economies of scale Governments often protect their home markets by introducing high import taxes
  9. 9. 2 | Bargaining Power of Suppliers Porter’s Five Forces Model Analysis The bargaining power of Toyota’s suppliers isWeak. Toyota has many suppliers in its automotive manufacturing sector. Resources like metal, raw materials, leather, plastic, computers, cooling system, electrical system, braking system and fuel supply system are all bought from hundreds of different suppliers and different bargaining prices distributed across the globe.. One of the competitive advantages of Toyota is its strong relationship with the suppliers and its efficient manner of monitoring supply chain places low bargaining power on the suppliers. In addition, most vehicle manufactures own many interchangeable suppliers, and also have the ability to produce the components by their own in the short time. Thus, the suppliers do not own the power to change the price.
  10. 10. 3 | Bargaining Power of Buyers Porter’s Five Forces Model Analysis The bargaining power ofToyota buyers isModerately Strong. Toyota has fierce competition because there are quite a few companies that have similar cars that can target similar markets (Eg. : Honda, Nissan, Ford,Volkswagen, etc.). There are many buyers andmost of the buyers are individuals that buy one car, but corporates or governments usually buy large fleets and can bargain for lower prices. Since the choices in the car market are abundant, it doesn’t cost much for buyers to switch to another brand of vehicle or to start using other type of transportation. The recent trends indicate that the customers are prone to seek out more fuel-efficient cars due to the rising oil prices. This also results in the increasing demand for the hybrid cars that offer cheaper alternatives for operating the vehicle coupled with higher expectations of product quality. However, the cost cutting practices implemented by Toyota in its operations lowers the buyer power and puts its cars into a more advantages position compared to its competitors.
  11. 11. 4 | Threat of Substitutes Porter’s Five Forces Model Analysis There is aModerate threat fromsubstitutes forToyota. Cars or automobiles are still the most convenient way of transport for the majority of the market who lives in suburban areas. Numerous other forms of transportation are available, but none offer the utility, convenience, flexibility, independence, and value afforded by automobiles. Although the public transport vehicles are possible substitute of automobiles like trains, taxi, busses and airplanes, these substitutes have disadvantages as they mostly only practical in cities and have fixed routes and timetables. The motorbikes and bicycles are also not relevant substitutes as they do not assure the comfort of a car. The switching costs associated with using a different kinds of transportation may be high in terms of personal time and comfort. High fuel cost may push more people to public transport but it will not create a real substitute for cars. To solve this problem,Toyota always being innovative to produce fuel-efficient cars for their customers. Toyota’s competitors are constantly developing themselves in terms technology, design, supply and quality.Toyota has to be on the top of their game to make sure the threat of substitutes is minimum. The marketing arms of the global automotive manufacturers like Toyota are certainly working very hard and with extraordinary production volumes worldwide, all signs indicate that they are succeeding.
  12. 12. Porter’s Five Forces Model Analysis 5 | Rivalry Among Existing Competitors The rivalry among existing competitors ofToyota is Strong. There are several competitors of Toyota in the automotive industry like Honda, Suzuki, Ford, Nissan, Proton, Perodua and so on. These major competitors are so closely balanced that it increases the rivalry. The competition also exist between the governments because the government will establish protection laws to protect the products of each own production. Product differentiation Constantly increasing competition is powered by the higher consumer expectations and anticipation for the lower prices. Lack of differentiation opportunities also will cause high rivalry and the companies will compare to each other constantly. However, Toyota always try to differentiate their products and services to increase the customer’s awareness and loyal to their brands. A focus on innovation and forward intelligent has brought Toyota into the lead in areas such as hybrid technology and automation of manufacturing facilities. Toyota remains a frontrunner in the low cost manufacturing, while its production system caused other car-manufacturers to change their operating approach.
  13. 13. Porter’s Value Chain Model Overview
  14. 14. Figure 2 : Porter’s Value Chain Model • Introduced by Michael E. Porter in his influential book “Competitive Advantage” in 1985. • Can be used by companies to examine all of their activities in the process of converting inputs to outputs. • How value chain activities are carried out determines costs and affects profits. • The value that's created and captured by a company is the profit margin (Value Created and Captured – Cost of Creating that Value = Margin). • The activities conducted can be divided into primary activities and support activities. Porter’s Value Chain Model | Overview
  15. 15. Inbound Logistics : Involve relationships with suppliers and include all the activities required to receive, store, and disseminate inputs Operations : All the activities required to transform inputs into outputs (products and services) Outbound Logistics : Include all the activities required to collect, store, and distribute the output Marketing and Sales : Activities inform buyers about products and services, induce buyers to purchase them, and facilitate their purchase Services : Includes all the activities required to keep the product or service working effectively for the buyer after it is sold and delivered 1 2 3 4 5 Primary Activities Porter’s Value Chain Model | Overview involve the purchase of materials, the processing of materials into products, and delivery of products to customers.
  16. 16. Support Activities Procurement : This is what the company does to get the resources it needs to operate. This includes finding vendors and negotiating best prices Technology Development : These activities relate to managing and processing information, as well as protecting a company's knowledge base. Minimizing information technology costs, staying current with technological advances, and maintaining technical excellence are sources of value creation Human Resource Management : This is how well a company recruits, hires, trains, motivates, rewards, and retains its workers. People are a significant source of value, so businesses can create a clear advantage with good HR practices Firm’s Infrastructure : These are a company's support systems, and the functions that allow it to maintain daily operations. Accounting, legal, administrative, and general management are examples of necessary infrastructure that businesses can use to their advantage Porter’s Value Chain Model | Overview support primary activities and can play a role in each primary activity. It may also support each other within support activities.
  17. 17. Porter’s Value Chain Model Analysis for PERODUA
  18. 18. Company Profile Porter’s Value Chain Model Analysis Company Name Perusahaan Otomobil Kedua Sdn Bhd, PERODUA President and CEO Datuk Aminar Rashid Salleh Company Address (Head Office) Perodua headquarters is located on an 138-hectare site in Sungai Choh, Rawang, Selangor Darul Ehsan Date Founded Established in 1993; Perodua’s plant opening ceremony : 1 August 1994 Shareholders UMW Corporation Sdn Bhd 38%, MBM Resources Berhad 20%, Daihatsu Motor Co. Ltd 20%, PNB Equity Resource Corporation Sdn Berhad 10%, Daihatsu (Malaysia) Sdn Bhd 5%, Mitsui & Co. Ltd 4.2% and Mitsui & Co, (Asia Pacific) Pte Ltd 2.8% Group Perodua Auto Corporation Sdn Bhd (PCSB), Perodua Sales Sdn Bhd (PSSB), Perodua Manufacturing Sdn Bhd (PMSB) and Perodua Engine Manufacturing Sdn Bhd (PEMSB). Main Business Activities Motor Vehicle Production (Compact Car & Mini Car) and Sales Overseas Sold in countries such as the UK, Singapore, Brunei, Fiji, Nepal, Mauritius and Sri Lanka Factory Area 64,000 square meters Production Capacity 250,000 units per annum on 2-shift cycle Fiscal Year From January to December Total Number of Manpower ~ 9,000 staff (as of June 2014)
  19. 19. Porter’s Value Chain Model Analysis | Inbound Logistics Primary Activities Perodua has good relationships with suppliers and the company provide the Electronic Supplier Information & Management System (e-SIMS) to reach its suppliers. The activities required to receive, store, and disseminate inputs done smoothly with good facilities provided at the Perodua plant. Personnel are well trained for overseeing the smooth transit of goods. Transparency and monitoring through deployment of IT. Efficient storage facilities to ease storage and retrieval.
  20. 20. Porter’s Value Chain Model Analysis | Operations Primary Activities The plant currently has the capacity to produce 250,000 units per annum on 2-shift cycle with Factory area of 64,000 square metres. Professionalism implemented in all operations. The manufacturing capabilities of Perodua and local Malaysian component manufacturers have resulted in achieving 75 LMCP (Local material component points). The manufacturing operations of the Perodua Group are being managed by the PCSB. Perodua Manufacturing Sdn Bhd is the company responsible for the manufacturing of Perodua vehicles. Perodua Engine Manufacturing Sdn Bhd undertakes the assembly of the vehicle engines and also manufacturing of selected engine component parts. Adequate training ensuring stable source of skilled manpower. Kanban and Kaizen system for continuous drive to improve efficiencies. Automated manufacturing processes. Maintenance for technical competence. Capacity Utilization – In 2004 Perodua started assembling the Toyota Avanza at their plant in Rawang, for sale in Malaysia.
  21. 21. Porter’s Value Chain Model Analysis | Outbound Logistics Primary Activities PSSB has 41 sales branches and 139 sales dealers nationwide to serve its customers efficiently and easily assessable. Efficient transportation and trained personnel. Efficient security system for prevention of any kind of pilferage.
  22. 22. Porter’s Value Chain Model Analysis | Marketing & Sales Primary Activities Conduct various campaign and promotions activities. Advertisement in all media. Provide panel of finance and insurance for customers. Structured approach to understanding the requirements of individual customers. Showrooms available nationwide. Overseas network and showrooms : UK, Singapore, Brunei and Fiji Island.
  23. 23. Porter’s Value Chain Model Analysis | Services Primary Activities Perodua keep the product or service working effectively for the customers after it is sold and delivered. The company has 46 service branches and 117 service outlets throughout Malaysia for customers’ convenience. Body Repair & Paint Centres available nationwide. Service information and service package provided for the customer. Easy availability of spare parts. Customer complaints handling.
  24. 24. Porter’s Value Chain Model Analysis Support Activities |Procurement Perodua use the Electronic Supplier Information & Management System (e-SIMs) to enable e-business and to reach out to their vendors and negotiating best prices. e-SIMs aim to establish smart business partnerships and develop more opportunities locally and globally by being able to response effectively and efficiently through supply chain technology. e-SIMs objectives & imperatives : To improve communication between Perodua and suppliers in a collaborative environment. To improve planning and scheduling capabilities. To ensure accurate and faster processing of transactions. Improve communication with internal employees. Increase operating efficiencies.
  25. 25. Porter’s Value Chain Model Analysis Support Activities |Technology Development Perodua has invested substantially amount in manpower and IT sofware for its R&D activities. Perodua’s R&D focuses on developing our capabilities in automotive technologies ranging from basic testing, design and styling engineering to manufacturing engineering skills. The activities include styling / modelling, concept car development and the ability to undertake major facelifts. The main activities of the R&D are localisation of car parts and components, styling and modeling of future models and facelifts of current product range. Other R&D facilities are the chamber, engine test lab and test course.
  26. 26. Porter’s Value Chain Model Analysis Support Activities |Human Resource Management Perodua believe that efficient human resource is vital in achieving the company mission. Encourage in teamwork and employees to put forth and develop ideas for greater efficiency and productivity. Focus on the development of our human resources by ensuring that regular specialised training is provided for success through quality human resource. Training provided include: Perodua Technical Education System (PTES) Perodua Technical Education System (Advance) Reward staff performance by constantly reviewing and upgrading the company benefits. Provide a conducive working environment and ensure staff who has displayed potential be given opportunities for career advancement.
  27. 27. Porter’s Value Chain Model Analysis Support Activities |Firm’s Infrastructure Perodua headquarters houses among others Perodua corporate building (with accounting, administrative, and general management department), R&D testing laboratories and styling studio, vehicle test track, manufacturing plant, engine plant, pre-delivery inspection area, vehicle distribution stockyard and parts warehouse. Factory area 64,000 square metres. Multi location facilities (showrooms and service centres). Strong leadership. Accounting, legal, administrative, and general management department
  28. 28. CONCLUSION • All in all, both Porter’s Five Forces and Porter’s Value Chain models are very useful for automotive industry and other company or an organisation to evaluate their competitive advantage and to gain more profits. • Currently, Toyota is world’s largest manufacturing companies by revenue. Net revenues of Toyota increased by 16.5% in FY2014 compared with FY2013, and operating income increased by 105.2%, in FY2014 compared with FY2013. The increase in operating income was mainly due to effects of changes in exchange rates and cost reduction efforts. • With good value chain management, Perodua has been quite successful in its business ventures. Itsminicars and superminis remains popular among Malaysians customers.
  29. 29. REFERENCES 1. Turban, Volonino, Sipior & Wood. (2011). Information Technology for Management, 8th Edition. John Wiley & Sons, Inc. 2. http://www.strategicmanagementinsight.com/tools/porters-five-forces.html 3. http://en.wikipedia.org/wiki/Porter_five_forces_analysis 4. http://www.mindtools.com/pages/article/newSTR_66.htm 5. http://en.wikipedia.org/wiki/Value_chain 6. http://www.ifm.eng.cam.ac.uk/research/dstools/value-chain-/ 7. http://www.ukessays.com/essays/marketing/the-information-system-of-toyota-company-marketing-essay.php 8. http://www.toyota-global.com/ 9. http://www.toyota.com.my/ 10. http://www.perodua.com.my/ 11. http://en.wikipedia.org/wiki/Perodua
  30. 30. THANK YOU…

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